*BG & Royal Dutch Shell: Better Together
BG Group is, for us, quite simply worth more as part of Royal Dutch Shell than it is on a stand-alone basis. BG was always set to become significantly FCF positive from 2016 but the challenge for its new CEO was how best to use that cash without what appeared to be meaningful further upstream growth opportunities outside of Brazil. Royal Dutch Shell through its acquisition should solve that problem for BG and, in doing so, enhance its own free cash flow generation and project portfolio. We also expect a combined group to achieve meaningful additional synergies over and above the $1bn pre-tax corporate savings and $1.5bn of lower exploration expenditure already announced. These incremental synergies for the combined group should come from optimising an even larger LNG business as well as operational improvements upstream but will only become evident once Shell is able to fully integrate the assets. There is a long way to go before the transaction closes and 2015 is set to be a difficult year for Shell given significant planned maintenance but as CEO Ben Van Beurden states "bold strategic moves shape the industry" and in making an offer for BG, we see Shell as a more robust business than it would be without it in almost any oil price environment. We rate the stock Overweight with an unchanged 2850p/sh price target. We rate BG Group as Equal Weight with a 1350p/sh price target.